Mid-Cap Stocks Set for Second-Half Surge

MILWAUKEE ( TheStreet) -- Medium-sized companies such as Mattel ( MAT), Noble Corp. ( NE), Western Union ( WU) and Limited Brands ( IDTI) will be second-half stars if the economy continues to grow, says Matt Fahey, manager of the Marshall Mid-Cap Value Fund ( MVEAX).

The $236 million mutual fund is little changed this year and has risen 23% over the past 12 months.

Welcome to TheStreet.com's Fund Manager Five Spot, where America's top mutual fund managers give their best stock picks and views on the market in a five-question format.

Why are mid-cap stocks the place to be right now?

Fahey: Mid-cap stocks are kind of a sweet spot within the market. They're still small enough they can grow to be large-caps, yet they're more established than small-cap companies. So they have established managements, market shares and outlooks.

One stock you like is Mattel. Why do you like the toymaker?

Fahey: Mattel is a selling at only 12 or 13 times earnings. They have had a little difficult time over the past couple of years. Revenues declined because of the global economy, margins have weakened a little bit because of the raw material costs to make a Barbie and package it, but I see all those things turning around. They have some new, creative products coming out. You have an A-plus management, an A-plus balance sheet, they're generating a lot of free cash flow and you get a 3.5% yield to wait for it. So I think Mattel would be considered a very high-quality company in this environment.

A lot of people are worried about drillers because of the offshore-drilling moratorium, yet you still like Noble. Why?

Fahey: Noble is a good contrarian bet. There are not a lot of people who are going to take a drilling story to a cocktail party and say, 'Hey, I just bought a driller.' But that's the attractiveness of it. I think Noble's trading at about a 10-year low, and the valuation tools I use I see earnings estimates falling. I'm aware of that. I think they'll continue to fall, but I think 12 months from now, owning a driller like Noble, which is a high-quality company, is going to pay off. I don't think this moratorium is going to last forever. There's just so much negative talk about drillers right now that I think it's a good place to be. It's also important to note that while Noble has 10% of its rigs in the Gulf, it was not involved in the BP ( BP) accident directly.

There remains a lot of worry about retail heading into the second half. Why do you own shares of Limited Brands, which has stores in a lot of malls?

Fahey: We bought Limited stock about nine months ago as a turnaround story. Limited has been shooting itself in the foot. They run Victoria's Secret and Bath & Body Works, and they've had their inventory systems out of whack. They finally got the systems up and running in Bath & Body Works and they're getting inventory in the right stores at the right time now, so they don't have to discount so much. They're going to transfer those talents over to Victoria's Secret and do the same thing. We expect margins, which are 8% or 9%, to move up toward 15%.

It is a consumer stock, and maybe that is why it's trading where it is, because a lot of people are afraid of the consumer. I really don't think people are going to stop wearing underwear or putting lotion for their hands, so while it is consumer, it's not so discretionary.

You're also a big fan of Western Union, another well-known brand name. Why do you like this company?

Fahey: Western Union is considered a mid-cap company, but it has about a $10 billion market cap, an established brand name and 420,000 locations around the world to send and receive money. They're in 200 different countries, so I call this a best-of-breed company, trading at about 12 or 13 times earnings. Their business model generates a lot of excess cash flow because there's really not much capital expenditures needed to run Western Union. They have a new CEO that's going to start in September that's already been announced. He's the former COO, and he did a very good job in running their European operations for the past 10 years. So when the economy picks up a little bit, we're going to see more people sending money back and forth. I think the risk reward on a stock like this is very good.

-- Reported by Gregg Greenberg in New York.

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Before joining TheStreet.com, Gregg Greenberg was a writer and segment producer for CNBC's Closing Bell. He previously worked at FleetBoston and Lehman Brothers in their Private Client Services divisions, covering high net-worth individuals and midsize hedge funds. Greenberg attended New York University's School of Business and Economic Reporting. He also has an M.B.A. from Cornell University's Johnson School of Business, and a B.A. in history from Amherst College.